Crypto traders have been seeking alternative sources of liquidity in over-the-counter (OTC) markets following substantial regulatory crackdowns that have led to a significant reduction in market depth on centralized exchanges. This increase in OTC demand can be traced back to the collapse of FTX in November, the failure of several crypto lenders last year, and more recently, the SEC’s decision to sue Binance. Zahreddine Touag, head of trading at Paris-based market-making firm Woorton, believes that the catalyst for this demand is the notable decline in market depth across exchanges.
Market depth, which measures liquidity by estimating the capital needed to move an asset in either direction, has drastically decreased. Last month, prominent market makers Jane Street and Jump announced reduced trading activity, compounding the liquidity problems caused by FTX’s collapse and leading to a more than 50% decrease in market depth on exchanges between November and May, according to data from Kaiko.
This week, it was revealed that market depth on Binance.US, the focal point of the SEC’s lawsuit, had plunged even more dramatically, by over 76%. This reduction in liquidity means traders seeking to execute larger transactions face significant slippage, as order books on exchanges remain thin. Consequently, the OTC market, which permits traders to conduct sizeable transactions without relying on exchanges, seems to be gaining more prominence.
“We’ve been receiving a lot more [OTC] demand,” says Woorton’s Touag. “Spreads are tight due to daily recurring flow we have on both sides from payment providers, brokers, and algorithmic traders.”
This shift towards OTC markets is reminiscent of the period following the 2014 hack and subsequent shutdown of Mt. Gox, then the largest crypto exchange. While the demand for digital assets persisted, peer-to-peer markets on platforms like LocalBitcoins emerged as the bear market champions. However, as crypto continued to penetrate traditional finance, high-profile firms became increasingly involved in the industry, dealing directly with Nasdaq-listed exchanges like Coinbase trading partners.
This week, the world’s largest asset manager, BlackRock, applied for a spot Bitcoin ETF to establish a secure investment vehicle for funds and trading firms to gain exposure to cryptocurrencies. Until the SEC, which has become more combative recently, approves this ETF, traders will be forced to rely on OTC transactions.
Source: Coindesk
